De-dollarization: yuan becomes second most-traded currency, passing the euro

Lorenzo Bagnato

23 November 2023 - 13:00

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As China keeps pushing its dreams of replacing the US dollar with the yuan, its internal economic strife might prevent it.

De-dollarization: yuan becomes second most-traded currency, passing the euro

For the first time in its history, the yuan became the world’s second most-traded currency, outclassing the euro. China’s currency has seen a surge in denominated bonds as the country’s central bank maintains interest rates at a negative level.

China issues yuan-denominated bonds from Shanghai and Hong Kong. The two stock exchanges serve opposite purposes: the former is for internal markets only, while the latter is open to the rest of the world.

Indeed, China trades with the external world using a different currency, the renminbi, whose value is linked to the yuan.

As China battles deflation, record-low exports, and the burst of its real estate bubble, its central bank keeps interest rates low to stimulate the economy. Though many experts believe the country’s golden age of economic growth is over, short-term investors are taking advantage of the situation.

Western institutions including Credit Agricole and the National Bank of Canada have millions of dollars in exposure in yuan-denominated bonds.

European carmakers have also bought billions of Chinese bonds to increase their presence in the world’s largest EV market. BMW, Volkswagen, Mercedes, and others plan on using their Chinese bonds to lease car businesses in China, something they already started doing.

A temporary condition

For all the reasons stated above, the yuan temporarily surged above the euro as the second most-traded currency in the world. Many point at this as the first step towards the internationalization of the yuan, something China boasted about for the last year and a half.

Specifically, Beijing wishes to replace the dollar as the global reserve currency and challenge the US dominance in the world’s financial markets.

However, most of these predictions are inaccurate. First of all, while the yuan might now be the second most-traded currency, it only occupies 5.8% of global transactions. The dollar sits very comfortably at 84.2%: the yuan will not be taking over any time soon.

Furthermore, half of the yuan’s cross-border transactions take place between Shanghai and Hong Kong (considered a “foreign market” by China). This means that technically speaking, the euro is still far ahead as the second most-traded currency in the world.

Moreover, most of these trades actually come from countries in the Belt and Road Initiative and are therefore already in China’s sphere of influence. There is no US ally who is actively switching to the yuan, ditching the US dollar.

Finally, these short-term investments will be grounded by China’s economic crisis, which many think will hamper the country’s competitiveness in the following years.

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